Mortgage Rates: An Easy Guide for Buyers
Millions of potential buyers are unaware of how mortgage rates work, but those who understand can save thousands. Our guide will help demystify the process.
If you’re in the market to buy a home, you have most likely thought about mortgage rates and how they might affect your purchase.
But to make the most of your potential home purchase, you need to understand how mortgage rates work—what they are, how they are determined, and how they impact the amount of money you’ll pay to purchase a home.
Our guide will explain mortgage rates, cutting through the confusion to help you understand exactly what you can expect when buying a home and how it will impact your bottom line.
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DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation.
What is a mortgage rate?
When you obtain a loan from a lender to purchase a home, your mortgage is the agreement between you and the lender to use that money to purchase or refinance a property.
Your mortgage rate, also known as an interest rate or mortgage interest rate, is the interest rate you’ll pay in addition to your home loan.
For example, as a rough estimate, your lender gives you $300,000 to purchase a home. This amount is called the loan principal. Each month, you’ll make payments to pay down this $300,000. This payment will be a combination of your mortgage rate and your monthly payment. The lower the mortgage rate, the better because that means you’ll pay less each month, with more money available towards your loan principal.
What are the different types of mortgage payments?
The mortgage you acquired and the estimated time it will take you to pay off your loan will impact your monthly interest rate and the type of payments you’ll be expected to make.
Generally speaking, you’ll encounter two primary types of mortgage rates.
Fixed-rate mortgage: If you have a fixed-rate mortgage, this means that your mortgage payment will be the same every month (or “fixed”). This will be true for the life of the mortgage, which is either a 15-year or 30-year loan. Additionally, your mortgage will be locked into a single interest rate for the life of the loan. It’s important to note that with a fixed-rate mortgage, though your rate is fixed, your property taxes and homeowner’s insurance can still increase, so plan accordingly.
This is one of several reasons (aside from affordability) that high-interest environments scare off potential homeowners—no one wants to lock themselves into a 7% rate for the life of a 30-year loan when there’s a chance 6% could be waiting for them. Ideally, you want to lock in at the lowest rate possible. While refinancing later can be an option, it can be difficult if the value of your home drops.
Adjustable-rate mortgage (ARM): An adjustable-rate mortgage starts at a lower introductory rate for a set period of time. When that period ends, your rate will adjust to align with the market. Typically, the initial interest rate for an ARM is lower than a fixed-rate mortgage,
ARMs are best for buyers who plan to own their homes for only a few years or who expect their income to increase while they own the property.
